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The Logit Equilibrium: A Perspective on Intuitive Behavioral Anomalies

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Author Info
Simon P. Anderson ()
Jacob K. Goeree ()
Charles A. Holt ()

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Abstract

This paper considers a class of models in which rank-based payoffs are sensitive to small amounts of noise in decision making. Examples include auction, price-competition, coordination, and location games. Observed laboratory behavior in these games is often responsive to asymmetric costs associated with deviations from the Nash equilibrium. These payoff asymmetry effects are incorporated in an approach that introduces noisy behavior via probabilistic choice. In equilibrium, behavior is characterized by a probability distribution that satisfies a "rational expectations" consistency condition: the beliefs that determine player's expected payoffs match the decision distributions that arise from applying a logit probabilistic choice function to those expected payoffs. We prove existence of a unique, symmetric logit (quantal response) equilibrium and derive comparative statics results. The paper provides a unified perspective on many recent laboratory studies of games in which Nash equilibrium predictions are inconsistent with both intuition and experimental evidence.

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File URL: http://www.virginia.edu/economics/RePEc/vir/virpap/papers/virpap332.pdf
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Publisher Info
Paper provided by University of Virginia, Department of Economics in its series Virginia Economics Online Papers with number 332.

Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Length: 40 pages JEL Classification: C72, C92.
Date of creation: Nov 1999
Date of revision:
Handle: RePEc:vir:virpap:332

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Web page: http://www.virginia.edu/economics/home.html

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Related research
Keywords: logit equilibrium quantal response equilibrium probabilistic choice auctions.

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Fudenberg, Drew & Levine, David, 1998. "Learning in games," European Economic Review, Elsevier, vol. 42(3-5), pages 631-639, May. [Downloadable!] (restricted)
  2. Charles A. Holt & Jacob K. Goeree, 1999. "Stochastic Game Theory: For Playing Games, Not Just for Doing Theory," Virginia Economics Online Papers 306, University of Virginia, Department of Economics. [Downloadable!]
  3. Rosenthal, Robert W, 1989. "A Bounded-Rationality Approach to the Study of Noncooperative Games," International Journal of Game Theory, Springer, vol. 18(3), pages 273-91.
  4. Harrison, Glenn W & Hirshleifer, Jack, 1989. "An Experimental Evaluation of Weakest Link/Best Shot Models of Public Goods," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 201-25, February. [Downloadable!] (restricted)
    Other versions:
  5. Anderson, Simon P. & Goeree, Jacob K. & Holt, Charles A., 1998. "A theoretical analysis of altruism and decision error in public goods games," Journal of Public Economics, Elsevier, vol. 70(2), pages 297-323, November. [Downloadable!] (restricted)
  6. Goeree, Jacob K. & Holt, Charles A., 2000. "Asymmetric inequality aversion and noisy behavior in alternating-offer bargaining games," European Economic Review, Elsevier, vol. 44(4-6), pages 1079-1089, May. [Downloadable!] (restricted)
    Other versions:
  7. Dufwenberg, Martin & Gneezy, Uri, 1998. "Price Competition and Market Concentration: An Experimental Study," Working Paper Series 1998:8, Uppsala University, Department of Economics. [Downloadable!]
  8. McKelvey Richard D. & Palfrey Thomas R., 1995. "Quantal Response Equilibria for Normal Form Games," Games and Economic Behavior, Elsevier, vol. 10(1), pages 6-38, July. [Downloadable!] (restricted)
  9. C. Monica Capra et al., 1999. "Anomalous Behavior in a Traveler's Dilemma?," American Economic Review, American Economic Association, vol. 89(3), pages 678-690, June. [Downloadable!] (restricted)
  10. Mookherjee Dilip & Sopher Barry, 1994. "Learning Behavior in an Experimental Matching Pennies Game," Games and Economic Behavior, Elsevier, vol. 7(1), pages 62-91, July. [Downloadable!] (restricted)
  11. Jacob K. Goeree & Charles A. Holt & Susan K. Laury, 1999. "Altruism and Noisy Behavior in One-Shot Public Goods Experiments," Virginia Economics Online Papers 331, University of Virginia, Department of Economics. [Downloadable!]
  12. Palfrey, Thomas R. & Goeree, Jacob & Holt, Charles, 2000. "Quantal Response Equilibrium and Overbidding in Private-value Auctions," Working Papers 1073, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
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  13. Selten, Reinhard, and Joachim Buchta, 1994. "Experimental Sealed Bid First Price Auctions with Directly Observed Bid Functions," Discussion Paper Serie B 270, University of Bonn, Germany.
  14. Basu, Kaushik, 1994. "The Traveler's Dilemma: Paradoxes of Rationality in Game Theory," American Economic Review, American Economic Association, vol. 84(2), pages 391-95, May. [Downloadable!] (restricted)
  15. Simon P. Anderson & Jacob K. Goeree & Charles A. Holt, 1998. "Rent Seeking with Bounded Rationality: An Analysis of the All-Pay Auction," Journal of Political Economy, University of Chicago Press, vol. 106(4), pages 828-853, August. [Downloadable!] (restricted)
  16. Dufwenberg, M. & Gneezy, U., 1998. "Price Competition and Market COncentration: An Experimental Study," Papers 1998-08, Uppsala - Working Paper Series.
  17. Goeree, Jacob K. & Holt, Charles A., 2005. "An experimental study of costly coordination," Games and Economic Behavior, Elsevier, vol. 51(2), pages 349-364, May. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Susana Cabrera & C. Mónica Capra & Rosario Gómez, 2005. "Introspection in one-shot traveler’s dilemma games," Emory Economics 0504, Department of Economics, Emory University (Atlanta). [Downloadable!]
  2. Jim Engle-Warnick & Ed Hopkins, 2006. "A Simple Test of Learning Theory?," ESE Discussion Papers 153, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
    Other versions:
  3. Philip A. Haile & Ali Hortacsu & Grigory Kosenok, 0820. "On the Empirical Content of Quantal Response Equilibrium," Cowles Foundation Discussion Papers 1432R, Cowles Foundation, Yale University, revised Jun 0820. [Downloadable!]
    Other versions:
  4. C. Monica Capra & Jacob K. Goeree & Rosario Gomez & Charles A. Holt, 2000. "Learning and Noisy Equilibrium Behavior in an Experimental Study of Imperfect Price Competition," Virginia Economics Online Papers 336, University of Virginia, Department of Economics. [Downloadable!]
    Other versions:
  5. Tilman Becker & Michael Carter & Jörg Naeve, 2005. "Experts Playing the Traveler's Dilemma," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 252/2005, Department of Economics, University of Hohenheim, Germany. [Downloadable!]
  6. Mathias Erlei, 2003. "Heterogeneous Social Preferences," TUC Working Papers in Economics 0001, Abteilung für Volkswirtschaftslehre, Technische Universität Clausthal (Department of Economics, Technical University Clausthal), revised Jun 2004. [Downloadable!]
    Other versions:
  7. C. Monica Capra & Susana Cabrera & Rosario Gómez, 2003. "The Effects of Common Advice on One-shot Traveler’s Dilemma Games: Explaining Behavior through an Introspective Model with Errors," Economic Working Papers at Centro de Estudios Andaluces E2003/17, Centro de Estudios Andaluces. [Downloadable!]
  8. Michel Benaim & Josef Hofbauer & Ed Hopkins, 2006. "Learning in Games with Unstable Equilibria," Levine's Bibliography 321307000000000547, UCLA Department of Economics. [Downloadable!]
    Other versions:
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